Is it Time to Charge?

13 May 2015

I recently saw a quote from the Former CEO of Coca-Cola, Bryan Dyson, which read ‘value has a value only if its value is valued’.

Which lead me to think, when was the last time I fully valued something that was free? You only have to look at overfishing, deforestation, and carbon emissions to see that, sadly, when there is no cost, humans abuse the resource. Yet, in most businesses, legal support is an all-you-can-eat buffet where you never have to see the tab.

As a result, one of the most persistent complaints of GCs is that clients outsource their work and abdicate risk management to legal. Or as one GC put it ‘the business expects us to do their jobs for them and then are surprised that we aren’t responsive enough’.

Most functions attempt to address this on the supply side, making persistent, mostly unsuccessful business cases for additional resources. However, the elasticity of demand for an in-house lawyer means legal workload is like the head of the mythical Hydra – as soon as you complete one matter another forms.

You see, success in business is a product of the collective behaviors of staff, suppliers and customers. Those behaviors are in turn a sum of the incentive structures within an organisation.

Many of the most progressive teams we work with take a different approach. They focus on the demand side of the problem. They observe that to position the function as a free service will lead to a misallocation of resources.

You see, success in business is a product of the collective behaviors of staff, suppliers and customers. Those behaviors are in turn a sum of the incentive structures within an organisation. In other words, implement incentives (or disincentives) and get sustainable change.

The most common approach to influence demand is a ‘charge back’ or Activity Based Costing methodology. Driven by tight budgets and increasingly sophisticated ERP systems this approach is growing in popularity in Legal (amongst other functions). Currently 24% of legal functions charge all of their costs back to the business. We see three practices that are applied with varying degrees of success:

1. The Legal Market:

Team members track time and charge a discounted hourly rate back to the business. The most confident functions use this to create a market (i.e. if the internal client feels they will get better value going to a law firm they can elect to do so). The most adventurous have even trialed ‘demand pricing’, increasing fees for quick turnarounds at peak periods.

Administrative Burden: High

Pros: Allows for a ‘competitive market’ for legal services. Ensures the function is a ‘virtual profit center’ focused on high-risk activities that leverage the functions competitive advantage (e.g. knowledge of the business). Eliminates any requirement for discussion on value.

Cons: Can create an administrative burden.

2. The Shared Service Function:

The function charges a blended hourly rate across the team (typically at a discount to a law firm). This is either charged back to the business or reported to the executive team as a proxy for the value delivered to their function.

Administrative Burden: Medium

Pros: Provides some quantification and transparency to the cost/value of services delivered.

Cons: May not address the core issue of resource allocation as effectively as a market-based approach.

3. The Cost Allocation:

Perhaps the simplest method, many functions proportionally allocate their costs back to business units or functions.

Administrative Burden: Low

Pros: Creates some level of awareness of the cost of legal services, encouraging executives to be conscious of consumption.

Cons: Provides limited transparency or incentive to encourage the line to be conscious of consumption.

Some teams will no doubt be reticent to try such an approach, as they fear: ‘what if the business doesn’t come to us anymore?’ However, in most cases business units are allocated an increased legal budget to ‘spend’ on the activities they choose. Finally, if you can’t create $300 an hour in value you are either doing the wrong work or doing the work wrong.